Bernanke Gives Dollar the Green Light

[mserve id=”Central_Bank_FED_Bernanke.jpg” align=”left” width=”400″ caption=”Fed Chairman Ben Bernanke” alt=”US Federal Reserve Chairman Ben Bermanke Fed” title=”Fed Chairman Ben Bernanke”]

Who has itchy fingers then? OK, we had our suspicions after the Fed minutes this week. The gut said the next meeting was appropriate, but they just could not wait. Last night, the Fed raised the discount rate to +0.75bps and shortened the term for discount loans (O/N from 28-days). Basically, the increase in the spread and reduction in maximum maturity is supposed to encourage depository institutions to once again rely on private funding markets for short-term credit and use the Fed only as a backstop source of funds. Albeit the timing was a surprise, their actions should be taken as hawkish because of the virtue of no patience.

The US$ is stronger in the O/N trading session. Currently it is higher against 16 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Overall, US data continues to point towards a country whose economic trend is only going one direction and that up. There are blips in some of the reporting, but consensus agrees that risk appetite is warranted, however, few are willing to go ‘all in’ it seems. Both PPI and US jobless claims surprised to the upside yesterday. PPI prices came in stronger than last month (+1.4% vs. +0.4%). How much of the increase will be passed along to consumer prices? Are we able to predict future Fed’s actions following this logic? Analysts will tell you that the most import piece that we can take away from this report are that the risks to inflation are ‘dissipating’. It seems that higher inflation break-evens are being priced in by markets, and there is enough resilience in CPI price pressures, leaving the Fed somewhat balanced on its inflation views. What’s left? Policy makers have only to deal with the upside risks! Core-PPI has trended higher for three consecutive months (+0.3% vs. +0.2%) and reflects the modest pass-through of rising price pressures at the raw materials and intermediate goods stages of production. Digging deeper, finished goods prices fell for women’s clothing, electricity, cars and computers. While crude materials prices climbed +9.6%, m/m, including a +6.6% rise ex-food and energy that implies more than just commodity pressures. Are companies squeezing profit margins? Or are they attempting to exert ‘supply chain pricing power’?

There are over +11m Americans receiving benefits. Even with the jobless claims rising +31k, w/w, to +473k, it remains range bound after the Washington Blizzards and despite positive signs to economic activity and the labor markets. Analysts are optimistic that the future weekly trend will print a headline less that +400k by mid year. Even with volatility between now and then, a private sector hiring recovery will make this happen. Digging deeper, the sub-sectors gave us a headline of mixed results. Extended Benefits claims improved (+206 vs. +236k), while Emergency Unemployment Compensation reversed last weeks decline (+5.8m vs. +5.5m). Overall, the number of unemployed receiving either EB or EUC continues to climb, proving that the length of time of unemployment is rising. It’s worth noting that only a few states, experiencing severe weather conditions last week, showed a drop in claims. Maybe we can expect an improvement in next week’s data because of a delayed relief print, but do not hold your breath.

And finally, it was a strong Philly Fed index print (17.6 vs. 15.2). The details look even stronger. New-orders rose from 3.2 to 22.7 and production climbed form 11.0 to 19.7, while employment rose from 6.1 to 7.4. Even more impressive, on an ISM weighted basis, the index rose from 52.5 to 55.1 (its highest level in 4-years). Yesterday’s headline print appeases investors concerns about the weakness in the Empire survey. The market should wait for more regional reports before making a decision.

The USD$ is currently is higher against the EUR -0.87%, GBP -1.44%, CHF -0.76% and JPY -0.13%. The commodity currencies are weaker this morning, CAD -0.74% and AUD -1.10%. Briefly again yesterday the loonie matched its 4-month high as oil prices climbed. Commodity prices have tentatively supported the currency. However, their resistance levels remain intact. Economic data yesterday showed that Canadian CPI increased +1.9% in Jan., y/y (the most in two-years). With policy makers maintaining a +2 % target for inflation, this print should be of no concern to Governor Carney. The BOC has pledged to keep O/N lending rates at a record low (+0.25%) through June this year, unless their inflation outlook shifts. Other data showing that foreigners bought +$104b of Canadian securities last year (double the previous record), certainly influenced the currency value over the past 12-months.Year-to-date, it is the fourth best currency vs. its southern neighbor. On a cross related basis, the currency has outperformed most of its major trading partners. Whether it’s an increased risk appetite or acting as a surety currency, the loonie by default has remained well sought after. Technical analysts expect to see consolidation at these elevated prices until capital markets get to witness a strong transparent message from the EU on the woes of sovereign debt. The Fed’s surprise discount hike has burst speculators the ‘trend remains your friend’ trading strategy. Governor Carney will be patient and absorb how ‘his’ currency reacts to a hawkish Fed.

The AUD has ended the week on a sour note, falling for a third consecutive day after the Fed took another step in ‘withdrawing economic stimulus measures’, thus damping demand for riskier assets. The AUD rallied to its strongest point earlier this week after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). The currency declines were tempered by Governor Stevens’s remarks that the Australia’s benchmark rate was below normal. He said borrowing costs for ‘businesses and households were still about 50 and 100 basis points below average’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike as early as next month. So far, the futures market is pricing in a 41% chance of a hike during the Mar. meeting. On pull backs, expect better buying of the currency (0.8920).

Crude is lower in the O/N session ($78.08 down -98c). Crude managed to hold their earlier gains yesterday despite a positive headline print from the weekly EIA report. Digging deeper, key weekly inventory data showed that distillate stocks fell more than anticipated. Distillate stocks (diesel and heating oil), fell -2.94m barrels last week vs. market expectations of only -1.5m barrel drawdown. The gains were somewhat tempered by the crude print climbing +3.1m barrels, much more than the +1.8m barrels that had been expected. A build in gas stocks of +1.62m barrels was in line with market expectations. While refinery utilization rates were near up +0.7%, w/w, to +79.1% of capacity. In retrospect, it was a fairly ‘neutral report’ but the market is acting firmly and does not want to implement any sell-off, especially with commodities showing strength after yesterday US data supporting growth. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite. With the dollar reigning supreme, commodities will have difficulties in holding their own.

Lack of conviction, enthusiasm and volume had speculators locking in hard earned profits accumulated during this weeks gold rally. In the grand scheme of things, concerns about deepening EU deficits becoming contagious should continue to support the yellow metal on much deeper pull backs. Already this week, the commodity managed to rally to a 3-month high on speculation that concern over Greece’s sovereign debt will spur demand for the ‘precious metal’ as an alternative to holding a currency. Investors believe that with so many sovereign-debt problems and too many Cbanks printing money, gold will be the only hard asset speculators want. As long as investors fear a Greek default that could spark a wider European debt crisis, the commodity remains coveted. However, the IMF has indicated that they will shortly begin on-market sales of 192 tonnes of Gold. This will temporarily dampen the bullish mood ($1,106). Continue to watch the dollar for direction, the Fed’s actions has given the currency a leg up again.

The Nikkei closed at 10,123 down -212. The DAX index in Europe was at 5,658 down -22; the FTSE (UK) currently is 5,313 down -13. The early call for the open of key US indices is lower. The US 10-year note backed up 8bp yesterday (3.80) and are little changed in the O/N session. Supply and fears of supply has both dealers and investors cheapening up the US curve aggressively. The Treasury Department said it will sell another +$126b’s worth of notes and bonds next week ($8b TIPS, $44b 2-yeras, $42b 5-years and finally $32b 7-years). Again, this is a record amount of product to absorb, especially with China putting the brakes on their requirements for US issues. The Fed has now ‘unlocked’ the front end, while the longer end continues to feel the pressure. Hiking the discount rate will hopefully cap the steepness of the curve.

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